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Part One Preparing for a New World

In the first few chapters, we lay out the context for this book, highlight-ing how environmental challenges have become an important part ofthe business landscape. In Chapter 1, we introduce the “Green Wave”sweeping the business world, and we present the logic for making en-vironmental thinking a core part of strategy. We also spell out some ofthe “mega-forces,” like globalization, that give the new environmen-tal imperative greater prominence. Finally, we provide an overviewof how we conducted our research and picked the companies that arethe focus of this book.

Chapters 2 and 3 introduce the new pressures—both natural andhuman—coming to bear on companies. These forces make attentionto environmental strategy essential for business success. We start inChapter 2 by highlighting the environmental problems facing hu-manity and every company, ranging from global warming to watershortages. For each issue in our environmental primer, we offer a crisp

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6 Preparing for a New World

summary of the problem, a review of the possible range of effects, andan analysis of how the problem might affect business.

In Chapter 3, we review the growing array of environment-oriented“players” on the field of business. We map 20 different categories ofstakeholders from traditional government regulators to powerful non-governmental organizations (NGOs) to increasingly environmentallyfocused banks. We highlight the questions these groups are askingabout how companies operate.

In brief, this part explains how and why the environment hasemerged as a critical strategic issue for companies of all sizes. It sets thestage for our tour of the critical elements of corporate environmentalstrategy. And it shows how careful thinking about the environmentcan provide a new basis for competitive advantage.



Chapter 1 Eco-Advantage

Washington, D.C.: General Electric CEO Jeff Immelt announces anew initiative, “ecomagination,” committing the mega-manufacturerto double its investment in environmental products—everything fromenergy-saving lightbulbs to industrial-sized water purification systemsand more efficient jet engines. Backed by a multimillion-dollar adcampaign, Immelt positions GE as the cure for many of the world’senvironmental ills.

Bentonville, Arkansas: In a speech to shareholders, Wal-Mart CEOLee Scott lays out his definition of “Twenty First Century Leader-ship.” At the core of his new manifesto are commitments to improvethe company’s environmental performance. Wal-Mart will cut energyuse by 30 percent, aim to use 100 percent renewable energy (fromsources like wind farms and solar panels), and double the fuel effi-ciency of its massive shipping fleet. In total, the company will invest$500 million annually in these energy programs. Moreover, in a movewith potentially seismic ripples, Wal-Mart will “ask” suppliers to

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create more environmentally friendly products: A growing share ofthe fish Wal-Mart sells will come from sustainable fisheries, and theclothing suppliers will use materials like organic cotton. The retail gi-ant has also developed a packaging scorecard to rate suppliers’ effortsto reduce waste and encourage reduced fossil fuel consumption. All ofthese initiatives, Scott emphasizes, “will make us a more competitiveand innovative company.”

By either market cap or sales, GE and Wal-Mart are two of thebiggest companies in history. Neither company springs readily to mindwhen you say the word “green.” But these are not isolated stories.Companies as diverse as Goldman Sachs and Tiffany have also an-nounced environmental initiatives. As the Washington Post observed,GE’s move was “the most dramatic example yet of a green revolutionthat is quietly transforming global business.”

What’s going on? Why are the world’s biggest, toughest, mostprofit-seeking companies talking about the environment now? Simplyput, because they have to. The forces coming to bear on companies arereal and growing. Almost without exception, industry groups are fac-ing an unavoidable new array of environmentally driven issues. Likeany revolution, this new “Green Wave” presents an unprecedentedchallenge to business as usual.

NEW PRESSURES

Behind the Green Wave lie two interlocking sources of pressure. First,the limits of the natural world could constrain business operations,realign markets, and threaten the planet’s well-being. Second, com-panies face a growing spectrum of stakeholders who are concernedabout the environment.

Global warming, resource constraints, water scarcity, extinction ofspecies (or loss of “biodiversity”), growing signs of toxic chemicalsin humans and animals—these issues and many others increasinglyaffect how companies and society function. Those who best meet andfind solutions to these challenges will lead the competitive pack.

The science, we stress, is not black and white on all these is-sues. Some problems, like ozone layer depletion or water shortages,are fairly straightforward. The trends are plainly visible. On otherissues—climate change most notably—some uncertainties about the



Eco-Advantage 9

precise speed and nature of global impacts persist. But the evidenceand scientific consensus are more than strong enough to warrant im-mediate action. Indeed, former U.S. vice president Al Gore and theIntergovernmental Panel on Climate Change (IPCC) received the 2007Nobel Peace Prize for clarifying both the importance of this issue andthe need for urgent response.

THE EVOLVING CHALLENGE

Environmental worries used to center on “limits to growth” and theprospect of running out of key natural resources like oil and industrialmetals. These concerns have often been overblown. A second line ofconcerns focused on pollution and has proven to be more enduring. Wenow know that humans can overwhelm the capacity of nature—fromlocal waterways to the global atmosphere—to absorb pollutants or toprovide the essential “ecosystem services” we need, such as fresh water,breathable air, a stable climate, and productive land.

A broad-based set of players now insists on attention to these issues.Government, the traditional superpower of influence on corporatebehavior, has not gone away. Far from it. Regulators worldwide nolonger turn a blind eye to pollution. Citizens simply won’t allow it.Across all societies, we see serious efforts to control emissions andmake polluters pay for the harm they cause.

Other actors, however, now play prominent environmental roleson the business stage. NGOs, customers, and employees increasinglyask pointed questions and call for action on a spectrum of issues.To give just one example, Hewlett-Packard (HP) says that in 2007,over $12 billion of new business depended in part on HP’s answersto customer questions about the company’s environmental and socialperformance. According to Pat Tiernan, HP’s VP of Environmentand Sustainability, these new elements can be a critical part of theprocurement decision and, in some cases, on par with traditionalcriteria such as price, delivery, and quality. These customer demandsreshape markets, create new business risks, and generate opportunitiesfor those prepared to respond.

The breaking news is the arrival of a new set of stakeholders on theenvironmental scene, including banks and insurance companies. Whenthe financial services industry—which focuses like a laser on return




on investment—starts worrying about the environment, you knowsomething big is happening. Wall Street stalwart Goldman Sachs an-nounced that it would “promote activities that protect forests andguard against climate change” and pledged $1 billion for investmentsin alternative energy, having already bought a company that buildswind farms—which it has since sold for a large profit. Upping theante further, Bank of America (working with Andrew’s guidance) an-nounced a $20 billion commitment to environmental initiatives andCitigroup committed $50 billion soon thereafter. Acting as a group,many of the world’s biggest banks have signed on to the “EquatorPrinciples,” and now the “Carbon Principles,” which require envi-ronmental assessments of major loans. And Wall Street analysts havebecome focused on the “carbon exposure” of companies, believingthat those who manage their emissions better than competitors willbe advantaged in the looming carbon-constrained world.

For a painful example of how this one-two punch of natural forcesand new stakeholders can slam a company, just ask Coca-Cola’stwo most recent ex-CEOs, Doug Ivestor and Doug Daft. Within thepast decade, the world’s largest soft-drink manufacturer faced angryprotests in India over its water consumption, came under pressureto stop using refrigerants that hurt the ozone layer, and withdrewits flagship bottled water Dasani from the British market after thesupposedly purified drink failed European Union quality tests. To-day, the company has a vice president, Jeff Seabright, dedicated towater and environment issues and a chairman, Neville Isdell, as wellas a new CEO, Muhtar Kent, who work closely with the company’sEnvironmental Advisory Board (on which Dan serves).

Environmental missteps can create public relations

nightmares, destroy markets and careers, and knock

billions off the value of a company. Companies that do

not add environmental thinking to their strategy

arsenal risk missing upside opportunities in markets

that are increasingly shaped by environmental factors.



Eco-Advantage 11

THE BUSINESS CASE FOR ENVIRONMENTAL THINKING

We see three basic reasons for adding the environmental lens to corestrategy: the potential for upside benefits, the management of down-side costs and risks, and a values-based concern for environmentalstewardship.

The Upside Benefits

Nobody, not even market-savvy Toyota, could have predicted thesuccess of its hybrid gas-electric Prius. Given the poor track recordof electric vehicles, this leap of faith was anything but a clear path toprofit. Yet Toyota executives saw potential value down the road, andthey could not have been more correct. After a decade-long researchpush, the Prius was named Motor Trend’s Car of the Year in 2004, bywhich time customers were waiting six months to get their hybrid cars.While Detroit was nearing bankruptcy, laying off tens of thousandsof workers, and offering “employee discounts” to everybody, Toyotawas raising prices, expanding production, collecting record profits of$13 billion in 2007, and taking the spot of world’s largest automaker.

Toyota’s green focus is no accident. In the early 1990s, when Toyotawanted to design the twenty-first-century car, it made the environ-ment a major theme, ahead of all the selling points that automakerstraditionally used: size, speed, performance, or even ability to attractbeautiful girls or hunky guys. Smart move.

Similarly, BP has rebranded itself as an energy company, prepar-ing to move “beyond petroleum” and investing in renewable energy.These companies have figured out that it’s better to remake your mar-ketplace and eat your own lunch before someone else does.

Our research suggests that companies that bring an environmentallens to their business strategy are generally more innovative and en-trepreneurial than their competitors. They see emerging issues aheadof the pack. They are better prepared to handle the unpredictableforces that buffet markets. And they are better at finding new oppor-tunities to help customers lower their costs and environmental burden.By remaking their products and services to respond to customer needs,they drive revenue growth and increase customer loyalty.




The “gold” that smart companies mine from being green includeshigher revenues, lower operational costs, and even lower lending ratesfrom banks that see reduced risk in companies with carefully con-structed environmental management systems. They also reap soft ben-efits, from a more innovative culture to enhanced “intangible” value,employee dedication, and brand trust.

Scholars and pundits have noted that businesses now face a worldwhere traditional elements of competitive advantage, such as access tocheaper raw materials and lower cost of capital, have been commodi-tized and whittled away. On this altered playing field, going greenoffers a vital new path to innovation and to creating enduring valueand competitive advantage. Nike executive Phil Berry puts it sim-ply: “We have two maxims. Number 1: It is our nature to innovate.Number 2: Do the right thing. But everything we do around sustain-ability is really about number one—it’s about innovation.”

The Downside Risks

Inside oil giant Shell, executives use the acronym TINA—There Is NoAlternative—to explain why they do some things. To them, thinkingabout how climate change affects their business or caring how stake-holders feel about the company is no longer optional. It’s just a fact oflife. Even through well-publicized problems with local communitiesand governments in places like Nigeria, Shell has continued to hone itsstakeholder relations skills. The company spends millions of dollarsworking with the people living around key oil and gas projects suchas the massive Athabasca Oil Sands in Alberta, Canada.

As head of Shell’s famed scenarios group, Albert Bressand helpedthe executive team think about what could hurt the company in thelong term. As he told us, “We are a prisoner of the market . . . thereare people who can remove our license to operate.”

The idea behind license to operate is simple: Society at large allowscompanies to exist and gives them a certain leeway. If your com-pany oversteps the bounds, societal reactions can be harsh and, in se-vere cases, destroy the company. Former partners of Arthur Andersenlearned that lesson at great cost when the accounting giant vanishedin the wake of the Enron scandal. Or remember the case of chemicalindustry leader Union Carbide? After the company’s 1984 disaster in



Eco-Advantage 13

Bhopal, India, which killed over 3,000 people, Union Carbide’s futurefell apart until finally it was swallowed by Dow.

More pointedly, society’s expectations about company behavior arechanging. A company that abuses the local environment can find it im-possible to get permits to expand operations. Regulators, politicians,and local communities raise fewer barriers for good neighbors.

Heavy industries are especially aware of this social license issue,but others feel the heat as well. After years of unfettered expansion,Wal-Mart has come under fire from protestors who contend that thecompany’s stores increase sprawl, destroy wetlands, and threaten wa-ter supplies. In some communities, regulators have joined the chorusand begun to impinge on the retail giant’s expansion plans. In internalmeetings, Lee Scott told Wal-Mart executives that their sustainabilityefforts would help protect the company’s “license to grow.”

Smart companies get ahead of the Green Wave and

lower both financial and operational risk. Their

environmental strategies provide added degrees of

freedom to operate, profit, and grow.

Environmental challenges can seem like a series of small holes in awater main, slowly draining value from the enterprise. Or they canappear suddenly as major cracks in a dam and threaten the entirebusiness. Maybe the problem is unexpected costs for pollution con-trol or a cleanup for which nobody budgeted. Maybe it’s a very publicdisaster like the Exxon Valdez. Sometimes, too, the downside of mis-managing these issues can get very personal. Executives who presideover the mishandling of toxic waste, for example, can face jail time.

Efforts to cut waste and reduce resource use, often called “eco-efficiency,” can save money that drops almost immediately to the bot-tom line. Redesign a process to use less energy, and you’ll lower yourexposure to volatile oil and gas prices. Redesign your product so itdoesn’t have toxic substances, and you’ll cut regulatory burdens—andperhaps avoid a value-destroying incident down the road. These ef-forts lower business risk while protecting the gold—reliable cashflows, brand value, and customer loyalty, for example—that com-panies have painstakingly collected over time.




The Right Thing to Do

Repeatedly during our research we asked executives why their com-panies launched environmental initiatives, some of which cost signif-icant money up front and had uncertain paybacks. More often thanyou might imagine—and far more often than we first expected—theysaid that it was the right thing to do.

Is the case for thinking and acting environmentally based on values?Not primarily. At least that’s not what we heard from the executiveswe interviewed. For most of them, the moral argument was not aseparate imperative. It was deeply intertwined with business needs.Building a company with recognized values has become a point ofcompetitive advantage, whether you have 2 employees or 200,000.Doing the right thing attracts the best people, enhances brand value,and builds trust with customers and other stakeholders. In fact, it’shard to conceive of a business asset more central to long-term successthan trust among stakeholders—or one that is more easily lost. Asinvesting legend Warren Buffett once said, “It takes twenty years tobuild a reputation and five minutes to ruin it. If you think about that,you’ll do things differently.”

Even those who agree with the late Nobel Prize-winning economistMilton Friedman that the main “social responsibility of business isto increase its profits” can’t ignore the growing ranks who believethat companies have an obligation to do more. The logic of corporateenvironmental stewardship need not stem from a personal belief thatcaring for the natural world is the right thing to do. If critical stake-holders believe the environment matters, then it’s the right thing todo for your business.

Environmental leaders see their businesses through an

environmental lens, finding opportunities to cut costs,

reduce risk, drive revenues, and enhance intangible

value. They build deeper connections with customers,

employees, and other stakeholders. Their strategies

reveal a new kind of sustained competitive advantage

that we call Eco-Advantage.



Eco-Advantage 15

MAGNIFYING FORCES

The Green Wave, with its threats and opportunities, rises within abusiness landscape already in the throes of radical change. Companiesface a number of mega-trends that interact with the effects of the GreenWave, accelerating change and magnifying its impact and scope.

Globalization and Localization

As author Thomas Friedman describes it, outsourcing is just the tipof the iceberg. The “flattening” of the global markets for goods andservices will disrupt nearly all industries. The continued rise of bothChina and India seems likely to have a profound effect on businessesacross the world, especially in North America and Europe.

Economic integration and trade liberalization intensify competition.Globalization creates opportunities for many, but fundamentally re-wards scale. Size, however, creates suspicion of excess power. Largeenterprises come under extra scrutiny for their business practices, in-cluding environmental impacts.

Simultaneously, the world is fragmenting, with niche markets de-manding tailored products and services. For example, in many of itsrestaurants in India, McDonald’s serves curry, not its brand-defininghamburgers. Operating in ways that respond to localized needs andpreferences is becoming essential. The scale of environmental issues,ranging from entirely local to inescapably global, only adds to thecomplexity of this already daunting management challenge.

Insecurity

The security tensions that have swept through the United States andmuch of the rest of the world in the wake of 9/11 are changing publicattitudes and the political landscape. Beyond fears of terrorism, there’sa growing public distress over reliance on oil from the Middle East.Increasingly, people express a willingness to pay a premium for fuelsupplies closer to home, including alternative energy sources such aswind or solar power. Thus, the energy future looks very different fromthe past, with profound environmental consequences.




Rising Commodity Prices

One of the biggest drivers of environmental focus in many companieshas been the rising cost of energy and other commodities essential forproduction. With oil having risen in price from $30 per barrel just afew short years ago to well above the $100 per barrel mark, almostevery company—and every household—will profit from investing inenergy conservation. The return on investments in energy-efficientlighting, heating and cooling, and insulation has shot up. Companiesneed to reexamine every aspect of a company’s energy “spend”—fromproduction to logistics. And with the price of other commodity in-puts also rising, the overall cost of doing business has gotten higherand “resource productivity” has become a corporate watchword. Thecompanies that can get efficient fast will succeed and profit, leavingslower, resource-dependent competitors in the dust.

Smart companies today go beyond analysis of their own efficiencyopportunities to find ways to enhance the energy efficiency and re-source productivity of their customers. They recognize that solvingtheir customers’ problems adds real value to the goods and servicesthey offer in the marketplace.

Government ↓ Business ↑

While the era of big government is over, public expectations about therole of business in meeting society’s needs are rising. Many would saythe regulatory system in America is becoming less burdensome, butin Europe regulations seem to be weighing more heavily on business.What’s common throughout the world is that companies are beingasked to do more voluntarily, not just for the environment but fora constellation of social issues including poverty alleviation, educa-tion, and health care. The debate about the appropriateness of theseexpectations rages on, but the trend is clear. An intensified focus oncorporate social responsibility (CSR) is here to stay.

Big business faces even more elevated expectations. Multinationalcompanies, with their global reach and ubiquitous effects, are held tohigher standards than are smaller companies. To those whom much isgiven, much is expected. When operating on foreign soil, companiesmust expect especially intense scrutiny. One telling example: WhileCoca-Cola faces ongoing protests in India over its water use at a plant



Eco-Advantage 17

in Kerala, the Indian-owned Kingfisher brewery down the road, whichuses far more water, draws no political ire.

Rise of the Middle Class in Emerging Economies

Let’s look at just one statistic: The number of cars in China and Indiais predicted to rise from less than 20 million at the beginning of thecentury to 1.1 billion (yes, billion) by 2050. The addition of hun-dreds of millions of working, middle-class people in the developingworld, all seeking a Western quality of life, will shake up nearly everyindustry. For those who are prepared, this new market offers consid-erable opportunity. But the same growth in consumption threatens todestroy natural resources and inflict planet-wide pollution on an un-precedented scale. In fact, in 2008 China overtook the United Statesas the world’s biggest greenhouse gas emitter.

Continuing Pressure from Poverty

Despite substantial middle-class growth, particularly in Asia, manyparts of the developing world continue to struggle with chronicpoverty. Expanding populations strain limited resource bases. Povertyforces short-term thinking that translates into environmental degra-dation. People cut down trees for fuel, for example, without regard tothe soil erosion and other negative consequences that follow.

So while the rise of a consuming middle class creates one set ofenvironmental threats, persistent poverty represents an equally serioussocial and ecological challenge that the business world avoids at itsown risk. As a top executive from ABN AMRO Real—the Braziliansubsidiary of the Dutch bank and a company on the front lines in thedeveloping world—observed, “Companies cannot succeed in societiesthat fail.”

Transparency and Accountability

“The web changes everything” seems like yesterday’s news, but theripples of the Digital Age continue to move through our economyand society. The famous “Moore’s Law” predicts that the density oftransistors on a microchip will double every 18 months. This trendhas held for 40 years and relentlessly drives computing power up and




the costs of digital technology down. For billions of people, an endlessvariety of information—and perhaps a degree of disinformation—isjust a click away.

The unprecedented level of transparency provided by the Internet istransforming the business world. With bloggers everywhere, includ-ing inside companies, anything that goes wrong anywhere in youroperations—or in your suppliers’ operations—can hit the Web nearlyinstantaneously. As the New York Times put it, the Internet “hasgiven the angry voices a more public outlet. The blogosphere is rifewith postings castigating BP, Wal-Mart, and other big companies, cit-ing everything from water consumption to unfair labor practices anddangerous smokestack emissions.” And this is not just idle chatteramong uber-geeks. The conversations that bloggers start can movefrom cyberspace to Main Street in the blink of an eye.

In a world of rising transparency and low-cost information, whois responsible for what becomes increasingly clear. As pollution andtoxic chemicals become easier to track back to their sources, we willknow which companies created them, shipped them, used them, anddisposed of them. No question about it: Full accountability is theemerging norm.

WHO SHOULD CARE

For some enterprises, a new green perspective will be transformative,leading to fresh thinking, new markets, profitability gains, and in-creased value. For others, the environmental lens may emerge moregradually and modestly, as another critical element of corporate strat-egy. With time, these companies may find long-term, sustained advan-tage, but not dramatic immediate gains, from being green. For the big,heavy industries, the gains are closer to being assured. But smaller and“cleaner” companies will find surprising benefits as well.

In today’s world, no company, big or small, operating locally orglobally, in manufacturing or services, can afford to ignore environ-mental issues. Of course, the opportunities and risks posed by theGreen Wave vary by company and by industry. Context matters inthe push for Eco-Advantage. No single strategy or tool will work inall companies or all circumstances. But Green Wave dynamics havebecome a fact of business life for nearly every organization. Compa-nies that dive beneath the wave, submerging themselves in the hope



Eco-Advantage 19

that it will pass, will be disappointed by its enduring presence andpounding tenacity.

Why Small Businesses Should Care

What about small businesses? Can they sit this one out? In a word,no. Here are six reasons why:

1. Laws that once applied only to big business are encroaching onsmaller enterprises. Even bakeries and gas stations must now com-ply with clean air regulations.

2. Small companies often have an edge in innovation. Of the morethan $100 billion in R&D money that each year is plowed into the“clean tech” marketplace, the bulk goes to new, smaller ventureswho historically have produced more breakthrough products andservices.

3. Going after the consumption choices of individuals remains diffi-cult politically, but advocacy groups have no problem demandingthat small businesses curb their impacts. So while personal carsmay not come under NGO attack, the emissions from taxi fleets ordelivery services make a relatively attractive target.

4. The Information Age is reducing the costs of pursuing smaller-scaleactors. New sensors, information systems, and communicationstechnologies make tracking pollution and monitoring regulatorycompliance cheaper every day. Even tiny enterprises now find ithard to fly under the radar.

5. Large customers are putting pressure on small-business suppliersto comply with environmental standards. One little New York-based software developer we know found itself answering toughquestions posed by a Tokyo-based telecom company with an ag-gressive auditing program for its supply chain. To stay on the listof preferred suppliers, the company had to implement an Environ-mental Management System—much more than a company its sizewould normally do.

6. Small companies can be more nimble than their larger competitors.Entrepreneurial businesses can move quickly to take advantage ofchanging circumstances or meet niche demands. Q Collection, a“sustainable” home furnishings company, produces couches, ta-bles, and chairs without toxic dyes and with wood sourced entirelyfrom sustainably managed forests. The furniture is priced at the




WHO SHOULD CARE THE MOST?

While we think this book is useful for anybody interested in a healthyenvironment and a healthy business community, clearly some companiesneed to worry about these issues more than others. And some sectors arepoised for greater upside potential. We see growing risks and rewards forcompanies with:

� High brand exposure. Companies with substantial goodwill andintangible value (including Coca-Cola, Procter & Gamble, andMcDonald’s) face special challenges.

� Big environmental impact. Those in extractive industries or heavymanufacturing (BP, Exxon, Alcoa, and LaFarge, for example) must ex-pect growing scrutiny.

� Natural resource dependence. Companies that sell fish, food, andforest products (such as Cargill, Nestle, and International Paper) arelikely to be on the front lines as society faces very real natural limits.

� Current exposure to regulations. Environmental strategy questionsplay a particularly important role for those handling hazardous ma-terials (DuPont), operating in heavily regulated industries like utilities(AEP), or in energy intensive sectors (airlines).

� Increasing potential for regulation. Automakers and electronics pro-ducers (like Ford and Intel) are facing new challenges with European“takeback” laws that require manufacturers to handle the disposal oftheir products after their customers are done with them. And the logicof “extended producer responsibility” is being picked up around theworld.

� Carbon exposure. Companies with big fossil fuel bills face a doublewhammy of higher prices and greenhouse gas emission charges.

� Competitive markets for talent. Companies in the service sector andthe “new economy” (such as Citigroup, Intel, or Microsoft)—whereprimary assets can walk out the door if they are displeased with thecompany’s values—must stay on top of environmental issues.

� Established environmental reputations. Those with problematic his-tories should expect extra scrutiny. Companies with good track recordswill get more leeway—and may benefit from goodwill in the market-place.



Eco-Advantage 21

high end of the market, but the company has found a customer baseof interior designers who want the natural option. And Hawaii-based Kona Blue has launched an environmentally friendly fishfarm to meet the growing demand for fish raised free of hormonesand antibiotics.

WHAT DOES A COMPANY SEEKING ECO-ADVANTAGE LOOK LIKE?

We studied dozens of companies during our four years of research. Afew have not evolved in their thinking since the 1970s. They are stillgrousing about legislation and complying with it grudgingly. Othershave begun to see the business opportunities in going “beyond com-pliance.” A few have embarked on bold new initiatives to providesolutions to the world’s environmental ills—like GE’s plan to sell re-newable energy, efficient power generation, water purification, andmuch more.

The companies who “get” the interface between environmental-ism and business—the ones that are on their way to reducing theirenvironmental impacts, or “footprints,” while generating significantprofits and sustained Eco-Advantage—have no single profile. Theyrange from global conglomerates to niche textile makers. However,we found certain patterns. The leading-edge companies go beyondthe basics of complying with the law, cutting waste, and operatingefficiently. They fold environmental considerations into all aspects oftheir operations. Specifically, they:

� Design innovative products to help customers with their environ-mental problems or even create new eco-defined market spaces.

� Push their suppliers to be better environmental stewards or evenselect them on that basis.

� Collect data to track their performance and establish metrics togauge their progress.

� Partner with NGOs and other stakeholders to learn about and findinnovative solutions to environmental problems.

� Build an Eco-Advantage culture through ambitious goal setting,incentives, training, and tools to engage all employees in the vision.

For the top-tier companies, environmental management started outas something they had to do. But that’s no longer the case. They’ve




evolved to the point where environmental management is second na-ture and their focus is now on mining the gold in environmentalstrategy.

ENVIRONMENTAL STRATEGY, SUSTAINABILITY, AND CORPORATESOCIAL RESPONSIBILITY

Companies find many ways to talk about how they handle environ-mental and social issues. Some focus on “triple bottom line” perfor-mance or sustainability. Others frame their work in terms of corporatesocial responsibility, stewardship, citizenship, or environment, health,and safety. Any of these approaches can serve to galvanize action andcreate Eco-Advantage. The key lies in execution—including environ-ment and social issues in business operations. But each company needsto find the language and organizational structures that work withinits own culture.

At the operational level, managing sustainability issues, no mat-ter what the company calls them, works best with a defined fo-cus. Thinking about environmental challenges alongside social issuessuch as health care, poverty alleviation, or how to serve the “bot-tom of the pyramid”—the untapped market of the world’s poorestpeople—quickly becomes daunting. Our research suggests that theskills needed to manage environmental issues and social concernsare quite distinct. For example, what’s required to ensure that acompany complies with air-pollution permits, say, will have littlesimilarity to what’s needed to develop a strong employee wellnessprogram.

Moreover, the environmental agenda has a concreteness that’s of-ten lacking on the social side. Obligations under the law are generallymuch clearer in the environmental realm, as are the opportunities forgaining a competitive advantage while doing the right thing. This isnot to say that social issues are unimportant. Indeed, some are moralimperatives. As Professor David Vogel of Haas Business School hasdemonstrated, however, the business case for taking up the socialagenda is much harder to establish. For all of these reasons, we fo-cus on defining the strategies and tools companies can use to takeadvantage of environmental opportunities.



Eco-Advantage 23

WHY SOCIAL ISSUES CAN’T BE IGNORED

While environmental and social issues pose different kinds of challenges,they both connect to corporate reputation. Any company that thinks itcan cover shortcomings in social performance with strong environmentalresults is kidding itself. Wal-Mart, for example, is a legitimate green leader,with large-scale initiatives and measurable results across its operations,from store energy use and fleet efficiency to product packaging. But itwon’t win any prizes for corporate responsibility if it falls short in thepublic’s eye on basic social issues such as wages, health care, and laborrelations.

ECO-ADVANTAGE IS NOT EASY

We wish we could say that finding Eco-Advantage will be easy. Butlike excellence in any form, you have to work for it. We know thisruns contrary to the message in many of the books and articles about“green business.” Ever since a few leaders like 3M demonstrated thepayoffs of eco-efficiency, going green has been portrayed as a surething. Unfortunately, not every environmental effort produces win-win results.

Developing innovative products, bringing them to market suc-cessfully, keeping customers happy, and other elements of businesssuccess are difficult enough. Adding an environmental dimensionopens up new opportunities but adds another layer of complex-ity to the management challenge. Gaining an edge means learningnew skills, operating in new ways, and working through some hardtrade-offs. In truth, the story is even more subtle. Some initiatives“fail” by traditional measures but create intangible value for a com-pany. It’s often hard to tell when hard-to-measure returns are worthpursuing.

This book attempts to bring nuance to a frequently oversimplifieddiscussion. We dig into real-world experiences in all their complexity,highlighting pathways to success but also analyzing initiatives thatdidn’t go as planned or absolutely flopped. We’ve extracted lessons,both positive and negative, from these case studies so that those nowseeking Eco-Advantage don’t need to start at square one.




WHY ENVIRONMENTAL INITIATIVES FAIL

Business strategies fail for many reasons, including poor planning, lackof commitment, and staffing the wrong people in key roles. But a fewparticular failings plague companies when they attempt to play in theenvironmental realm: focusing on the wrong issues, misunderstandingthe marketplace, miscalculating customer reactions to green products,and failing to integrate environmental thinking fully into the work of thebusiness. Chapter 10 reviews 13 common stumbles that our research un-covered, but we’ll touch on some of them earlier in the book to highlightthe challenges of the task executives have before them.

The bottom line: Environmental initiatives take no less work than otherprojects. And they fail just as often. Kermit the Frog was right: It’s not easybeing green. But sound environmental strategy can be very rewarding.

WHO’S RIDING THE GREEN WAVE?

Defining a leader in financial performance is fairly straightforward.Pick your metric—stock performance, cash flow, or net income—andfind the companies with the best or the most. Determining who theenvironmental leaders are proves far harder. Reliable data are of-ten not available. Companies tend to measure performance in theirown ways, if at all. No set of commonly accepted standards has yetemerged. Fundamentally, the environmental arena lacks the structureand rigor provided in the financial realm by the Financial AccountingStandards Board.

We began our research by trying to identify leading companies us-ing the information available. (The details of our methodology canbe found in Appendix II.) We drew on the environmental and sus-tainability scorecards generated by the analysts at Innovest StrategicValue Advisors, Sustainable Asset Management (which Dow Jonesuses to produce its sustainability index), and others in the field ofsocially responsible investing. We combined these rankings with ourown data, including a survey of executives. After narrowing a fieldof 5,000 companies to 200, we examined concrete measures of en-vironmental impact such as emissions and energy use. This processgenerated a list of leaders we call “WaveRiders” (see table). While



Eco-Advantage 25

Top 50 WaveRiders

United States International

1 Johnson & Johnson BP2 Baxter Shell3 DuPont Toyota4 3M Lafarge5 Hewlett-Packard Sony6 Interface Unilever7 Nike BASF8 Dow ABB9 Procter & Gamble Novo Nordisk10 SC Johnson Stora Enso11 Kodak Philips12 Ford Bayer13 IBM Holcim14 Starbucks STMicroelectronics15 Intel Alcan16 Xerox Electrolux17 McDonald’s Suncor18 GM Norsk Hydro19 Ben & Jerry’s Henkel20 Patagonia Siemens21 International Paper Swiss Re22 Alcoa AstraZeneca23 Bristol-Myers Squibb Novozymes24 Dell IKEA25 United Technologies Ricoh

they are unavoidably incomplete, these rankings provided a startingpoint for our in-depth company reviews and interviews.

This list is a snapshot from early on in our research. Would therankings today be different? Of course. A prime example is BP, whichsits atop the international WaveRiders list. In the past few years, thecompany has had some serious breaches in safety and operations thathave called into question its environmental and social leadership. Orlook at Ford and General Motors (GM), which have been slammedby a seismic shift in consumer demand away from trucks to smallercars. The key point is that we used this list as a way to identify whichcompanies to focus on, not as a definitive pronouncement on whichcompanies will lead the pack.




We explored several dozen of these top companies in detail, seek-ing a diversity of industry, geography, and perspective on criticalenvironmental issues. Aware that perception plays a large part in therankings, we added to the mix a few companies that were too small tobe noticed generally but were well-known in industry circles—outfitssuch as the Swiss textile manufacturer Rohner Textil. We also soughtout leading companies that tend not to trumpet their environmentalfriendliness, like furniture maker Herman Miller or cell phone giantNokia. Finally, we made a point of speaking to some companies, likeGE and Coca-Cola, that were not considered leaders at the time, butnow are either expressly seeking Eco-Advantage or have elements oftheir operations that are top-notch and worth studying.

We’ve made no attempt to study every WaveRider. Some industriesare so well represented that it would have been repetitive to spend timewith all the companies. Other stories are too unique to yield guidancefor the typical business. Patagonia, for example, is arguably the mostenvironmentally focused company in the world, but it’s owned al-most entirely by the founder, Yvon Chouinard, who prides himself onputting values ahead of profits. Indeed, he often jokes that he neverwanted to be a businessman.

We did not shy away from companies facing significant envi-ronmental challenges due to the inherent demands of their indus-tries. Many of the WaveRiders are still big polluters—some of thebiggest in the world. But they have smaller footprints than others intheir industries. We believe that relative position matters. As long asthe demand exists for energy, chemicals, and metals, we think it’svaluable to highlight those who do these dirty jobs best. But callingthem leaders doesn’t mean that their work is done. In many ways, it’sjust beginning.

The Bottom Line

Have WaveRiders been hurt by their focus on environmental matters?Much ink has been spilled trying to prove or disprove the connectionbetween environmental and financial performance. We don’t wantto add to wild claims in either direction, but when we examine thestock performance of the publicly held WaveRiders versus the market



Eco-Advantage 27

Stock Performance of WaveRiders250

200

150

100

50

01998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Year

Inde

x (J

anua

ry 1

998

= 1

00)

WaveRider AverageS&P 500FTSE 100

overall, the trend is clear (see chart). These companies have easilyoutperformed the major indices in the past 10 years.

A word of caution: Correlation is not causation. The relative stockmarket success of our WaveRiders might well be a function of high-quality management generally rather than any specific green focus.Indeed, a number of studies have demonstrated that environmentalperformance is a powerful indicator of overall management quality.

A Sustainable Path?

No company we know of is on a truly long-term sustainable course.Three additional caveats are thus required:

1. All of the WaveRiders are polluting and depleting the world’s nat-ural resource base to some extent.




2. Many of the companies we highlight as leaders come from indus-tries with serious environmental impacts, but the WaveRiders are“best in class” or have practices from which others can learn.

3. Not every environmental investment the WaveRiders have madehas paid off. In fact, all of these companies have failed at times. But,overall, their environmental focus has helped them competitively.

These companies aren’t perfect. Some are strong on one aspect of en-vironmental performance but weak on others. But they are all makingstrides. They are demonstrating a new way of doing business. In thesecompanies, we see evidence of how to obtain Eco-Advantage—and thebeginnings of a shift toward a world where environmental protectionand business success go hand in hand.

THE PATH AHEAD

The chapters in Part One, “Preparing for a New World,” describe thebusiness playing field that increasingly makes environmental thinkingboth profitable and necessary. Chapter 2 spells out the major envi-ronmental challenges that every company faces. It reviews the state ofthe debate on 10 major environmental problems facing the businessworld and humanity. In Chapter 3, we turn to the stakeholders whocare about these issues and can affect a company’s fortunes deeply.We lay out a framework for thinking about five groups of players,including watchdogs (such as NGOs), agenda setters (think tanks),business partners (customers), communities, and investors (banks).

After this important stage-setting, we lay out the basic elements ofan environmental strategy in Parts Two and Three (Chapters 4 to 9).

Part Two, “Strategies for Building Eco-Advantage,” provides theplaybook. Chapters 4 and 5 describe the eight key “plays” for creatingadvantage from environmental thinking. We provide a framework foranalyzing how these strategies reduce downside costs and risks orcreate upside opportunities—and whether the outcome is fairly certainor less bankable.

We turn to the nuts and bolts in Part Three, “What WaveRidersDo.” Chapter 6 spells out what leading companies do to foster an Eco-Advantage mindset. We lay out how WaveRiders make environmentalthinking fundamental to their work. This approach sits at the core ofa set of important tools and actions. Chapter 7 looks at how leading



Eco-Advantage 29

companies mine data, track their environmental performance, andwork with others to refine their strategies. Chapter 8 explores theways these leaders redesign their products and their supply chains.And Chapter 9 describes ways to build an Eco-Advantage culture thatengages both top managers and line employees.

In Part Four, “Putting It All Together,” we provide an action agendafor building Eco-Advantage. Chapter 10 highlights what can go wrongon the path toward environmentally driven competitive advantage.We review common pitfalls and demonstrate why so many environ-mental initiatives fail. In Chapter 11, we suggest a plan of attack withshort-, medium-, and long-term action items drawn from the ideasand tools throughout the book. Finally, in Chapter 12, we review allof the elements required to execute an Eco-Advantage strategy.

GREAT TO GOOD

Sometimes people need a crisis to focus the mind. Wal-Mart CEO LeeScott was moved deeply by the devastation wrought by HurricaneKatrina in 2005. He was also profoundly proud of his company forhow it helped storm victims. But the company’s finest hour got himasking:

What would it take for Wal-Mart to be that company, at our best, all thetime? What if we used our size and resources to make this country and thisearth an even better place for all of us: customers, Associates, our children,and generations unborn? What would that mean? Could we do it?

Scott went on in his speech to make the business case for attentionto environmental issues and concluded on a note that many corporateCEOs might find mushy. “For us,” he said, “there is virtually nodistinction between being a responsible citizen and a successful busi-ness . . . they are one and the same for Wal-Mart today.”

What is Lee Scott really driving at? We think it’s a new definitionof greatness. As business guru Jim Collins so clearly demonstrated inhis pathbreaking book Good to Great, companies need a deep vision,culture, and commitment, as well as a set of critical approaches, tomake the move to lasting greatness. What Scott and other CEOsare saying is that great, in the traditional sense, isn’t really goodenough anymore. GE’s Jeff Immelt put it most succinctly during his




ecomagination kick-off speech: “To be a great company, you have tobe a good company.”

Companies that are both great and good inspire. Customers feelstrongly about those brands, and employees work harder (and havemore fun doing it). Seeking Eco-Advantage is a challenging road filledwith significant potholes. There’s no easy route from green to gold.But the WaveRiders are showing the way.

Documents

Part One Preparing for a New World COPYRIGHTED …...Part One Preparing for a New World Intheﬁrstfewchapters,welayoutthecontextforthisbook,highlight- ing how environmental challenges